The Euro Crisis and the Real Estate Sector

The current euro crisis is fueling treacherous headwinds throughout the European real estate sector, which could turn into a catastrophe if the Eurozone breaks up. If Greece were to exit the 17-nation union, the Eurozone’s gross domestic product (GDP) would fall by 2 percent before there would be intervention, predicted Andrew Garthwaite, global equity strategist, investment banking, at Credit Suisse, at the ULI Europe Trends Conference held in London May 30-31, which focused on the Olympic Games’ legacy. The effect would spread to Portugal, Italy, and Spain, with questions raised over whether they should be allowed to stay in the Eurozone, as well as doubts over the worth of the euro.

Christian Schulz, Berenberg Bank senior economist, estimated the chance of that happening is fifty-fifty. A complete euro breakup is very unlikely, in Garthwaite’s opinion, given that both the direct and indirect costs would be “phenomenal”—higher, in fact, than the cost of a bailout. In this scenario, GDP would fall by 5 to 10 percent.

“The ramifications of a Eurozone breakup could be quite serious for someone invested in Europe,” warned Jon Zehner, senior director of AREA Property Partners. One of the most troublesome implications is that real estate finance would become even more difficult to secure, said Struan Robertson, Morgan Stanley’s global cohead real estate investment banking, with “banks focusing even more narrowly on their domestic markets.” He advised investors to concentrate on refinancing and “hope that you’ve got domestic banks that will finance that.”

For those who aren’t already invested in Europe, the prospect may represent too much risk. “Who is sophisticated enough to know how to invest in Europe today?” asked Zehner. “It’s hard for anyone to take decisions because the uncertainty is so high.” The company’s recent pitch to a Korean investor, which featured property in the U.K. and Germany—Europe’s biggest magnets—was dismissed in favor of a U.S. opportunity.

London’s reputation as a safe haven for investment is also on shaky ground. A breakup of the Eurozone could impede capital inflows into the residential sector, for one, as the value of the euro falls and sterling rises. Office values face a hefty blow in their own right, due to the sector’s reliance on financial services.

Joe Montgomery, ULI Europe’s chief executive, even voiced concern over the ability of East London, host of the Olympic Games, to maintain what he dubbed “investability” amid turmoil in the Eurozone. However, Andrew Altman, chief executive of the London Legacy Development Corporation, presented Qatari Diar’s investment in East Village (a post-Olympics housing complex) as well as Westfield Group’s presence as evidence that the private sector has picked up on the opportunity despite the tough climate. His view is that “private investment will accelerate, if not increase dramatically.”

“We are 40 percent of the way through the adjustment we need [to solve the euro crisis],” said Garthwaite. Among the issues he identified that must be addressed in order to achieve this were growth, and the current account surplus. Rectifying the “solvency of the insolvent,” as well as common ownership of debt, was also highlighted.

Europe’s “silver lining” is that total leverage is “actually good,” Garthwaite noted. The problem lies with the distribution of debt, not the amount of it.

“There is a solution,” he insisted—namely, quantitative easing and “getting the euro down to parity.”

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